How much cash in portfolio?

[stephen902]

How much cash do you keep in your portfolio? This is not in relation to 'emergency' funds or anything of the sort. I typically have kept zero cash. I typically have a few months of living money in my personal cash account and that's it. However I was recently talking to some fellow investors who keep 10-20% in CASH. They want the opportunity for purchasing power if a good investment arises. I feel like this is a form of market timing.

What are the thoughts? Thanks.

[JAYSLOL]

Yes, it's a form of market timing.  Although for some people who dabble in individual stocks and especially real estate, having a cash fund to scoop up a deal on a stock or underpriced property makes sense.  If your that type of person, go for it, if you prefer to put everything in index funds skip the cash and keep 100% of your portfolio working for you. 

[DreamFIRE]

Sometimes people say cash when they may be referring to cash equivalents, like money markets and CDs.

I have a sizeable amount of cash equivalents in the form of money market funds that is simply part of my non-stock allocation.

[Apple_Tango]

I think if you want to keep a percentage in cash, you should rebalance that just as you rebalance everything else.

So if your target allocation is:

5% cash
10% Bonds
85% Stocks

And if at the end of Q1 you find that due to the stock dip, you are at 12% cash, 8% bonds, and 80% stocks, then you would sell the cash and buy more bonds and stocks. This is just rebalancing, not market timing. But it has the advantage that it makes you always buy stocks at a "low" and sell at a "high".

[stephen902]

I think if you want to keep a percentage in cash, you should rebalance that just as you rebalance everything else.

So if your target allocation is:

5% cash
10% Bonds
85% Stocks

And if at the end of Q1 you find that due to the stock dip, you are at 12% cash, 8% bonds, and 80% stocks, then you would sell the cash and buy more bonds and stocks. This is just rebalancing, not market timing. But it has the advantage that it makes you always buy stocks at a "low" and sell at a "high".

This actually sounds really good to me. I guess no one really knows, but how much is appropriate? If it's too high then you've always got a lot of money sitting on the sidelines. If it's too low, then when a dip happens you don't really have much investing power. This is a tough question and I suppose it's personal preference. Thoughts?

[Apple_Tango]

Well that's the million dollar question isn't it? It's about risk tolerance. I think on this forum, people tend to do somewhere between 80-100% stocks. If your risk tolerance is high, do a 0% cash, and just float yourself on credit cards or use a Roth as your emergency fund. If your risk tolerance is lower, you might do 15% cash, 5% bonds, 80% stocks. I'm pulling these numbers out of the air- you can play around until you find percentages that are in the sweet spot for you.

Financial people generally recommend at least 6 months of expenses in cash, so let's say 6 months of cash only equates to 2% of your portfolio, maybe 2% is your number. If it's 20%, then maybe that's your number. 

Also, "cash" can include money markets and CD's as mentioned above.

[SwitchActiveDWG]

About 2% cash/cash equivalents for me.

I am 28 years old for perspective.

[mintleaf]

We've got 20% in cash equivalents as part of our asset allocation. We're quite a bit more conservative than a lot of folks here, but we're also approaching semi-retirement, so I think it makes sense. Whenever the next big downturn hits, that cash pool should provide a nice buffer, allowing us to spend without selling stocks low, and in fact rotate money into stocks automatically via rebalancing.

[Much Fishing to Do]

I think there are a number of investors who are now looking at holding bond funds as a likely losing proposition but don't want to raise risk by moving more into equity so are splitting that part of their portfolio between bond funds and cash. 

Once I FIRE my plan is to keep about 12-24 months expenses in something like CDs with one that will mature each quarter to fund that quarter's expenses.  That will effectively create a small cash equivalent allocation.  It does admittedly have a market timing element to it as in a sharp market downturn like 2008 I'll likely not turn the portfolio into cash each quarter and live off of the current cash until its used up, and that plan could admittedly backfire.

[SeattleCPA]

This tangential comment... IRS statistics show that the wealthiest taxpayers often keep a surprising amount of their net worth in cash--nearly ten percent.

My guess is people aren't doing this to be cautious so much as (a) providing liquidity so they can be opportunistic and then (b) reflecting the reality that their balance sheets often are way more illiquid.

I blogged about this here and provide some tables of recent IRS data:

https://evergreensmallbusiness.com/irs-wealth-statistics-paint-fascinating-picture-top-one-percent/

[Bill_]

Over the long term, cash is a wasting asset due to the effects of inflation.  In a portfolio the name for this effect is cash drag.

If someone takes an indexing approach, I don't think it's wise to keep too much cash on hand for investment purposes.  It can lead to attempts at market timing.  It's better to just take accumulated cash and invest on a regular basis into ones chosen index or indexes.

However, if someone is taking a value investing approach, then it makes more sense to keep some cash on hand since the investor will likely need to maintain liquidity when other sources of cash can prove hard to come by.

The best value investor of all time (Warren Buffett) has about 20% of the market value of his company in cash (short term treasuries) right now.

Yet, he only advocates the average investor keep 10% of their long term savings in cash (rough interpretation).

[kpetar]

Cash is king. Ouch, sorry... Cash is trash :) Joking aside...

It really depends on the valuation level of stocks.

When stocks are low-priced or moderately priced, it makes sense to go with up to 80 percent stocks and to have the rest in cash-like asset classes (I prefer TIPS or Bonds to pure cash because they are covered for inflation).

[HBFIRE]

as long as my credit union keeps giving me 4.6% (up to 20 K balance), i have no issue with keeping this amount in cash. 

[DreamFIRE]

I think there are a number of investors who are now looking at holding bond funds as a likely losing proposition but don't want to raise risk by moving more into equity so are splitting that part of their portfolio between bond funds and cash. 

Yes, cash equivalents in my case.  However, through my retirement plan, we have a "fixed interest" option which is guaranteed 3%, and I treat it as cash as well due to the guaranteed interest rate, but it's actually backed 80% by bonds, and it's only guaranteed until they change it, although it's been 3% for at at least 6 years, so it's not changing all the time like savings accounts, money markets, and CD rates.

[stephen902]

Thanks for the thoughts. My conclusion is some form of cash holdings (treasury vs CD vs high-interest-savings account) is a good idea. When the 52 week level for the indexes are very high then you probably want more cash. When they are low, you probably want to start dumping cash. I like the idea of T-notes/CDs in a ladder form so that you can slowly infuse cash into the market if it's taking a down turn. I just bought a Tnote of fidelity for 1.8% for 6 month which is up from previous. I think I'm going to keep going until I have a nice trickle and maybe about 10% in 'cash.' As always, a portfolio is a work in progress. 

[Car Jack]

The OP framed this is investments only....not emergency fund.  With that, I'm at zero cash.  If there's a big crash and equities drop wrt bonds, they'll hit my rebalance bands and I'll do a simple "sell dollars to buy" in my IRA and bring my AA back to the 50/50 target I've set up.

[talltexan]

It depends on your age and your savings rate. It's more important to be liquid when you're within a few years of retirement on either side.

It's easier to generate liquidity when you're accustomed to pumping 60% of your cash flow into investments; when an emergency comes, you just redirect that toward the emergency.

[KTG]

I honestly think that you should carefully think about what you might need to get by for 6 months or so in emergency funds, and maybe even double that.

Hypothetically, anyone can say that cash is wasting away and should be invested, however, I just happened to be cash rish at the start of the Great Recession, and I had real money while everyone else had money in homes that were underwater, in the market that had crashed, and were probably carrying significant credit card debt. People were losing their jobs left and right.

I guess if you have had money in the market the last 20 years and can handle a large drop in value in your portfolio, then I guess have less cash. But if you've been in it for a short time, and a major correction or crash will put your portfolio in the red, then having enough cash to weather a storm might be better. Granted, the Great Recession was  some time ago, and you could do the math on what the cash NOT being in the market has cost you, but I knew a lot of people who had wealth that looked good on paper before the crash, and lost a tremendous amount because they couldn't pay bills. I will just never forget it.
 
People's memories tend to be short, and fall into a trap where they are unprepared for inevitable changes ahead, believing that everything is predictable and will continue as they are today. That is just not the case.

Its a very personal decision. Use what others recommend as a place to start and then crunch your own numbers. Maybe model a scenario on how you would feel if the stock market went down 10%, 20%, 30% for an extended time and how you would do in that situation.

[Mississippi Mudstache]

I try to keep total cash in my portfolio to <1% at all times. I'm 100% index investing, though. If I were investing in real estate, it would make sense to keep a reserve of cash to take advantage of opportunities. It doesn't make sense for me.

[Radagast]

I agree with this

It depends on your age and your savings rate. It's more important to be liquid when you're within a few years of retirement on either side.

and this

About 5% for us, half in online savings, half US savings bonds and iBonds.

Right now wife and I have income streams which are increasing in quantity, security, and redundancy every year, so cash is not something we need much of. In retirement those things will become a bigger issue, especially ~5 years before through ~7 years after if there is a sharp income cutoff. We'll have more in cash and bonds then. I'd like to keep my cash/bond yield and duration near the market's. I plan on using I-bonds, bank accounts, highish yield municipal bonds (VWALX), and long duration treasuries (EDV) to roughly match Total Bond for duration and yield. Or, I may just say "screw it that is too complicated."